The Drill on Military Base Conversion

Since the early 1990s, three waves of military base closings have resulted in the decommissioning of 97 facilities, releasing more than 100,000 acres and thousands of buildings for redevelopment. From Long Beach, Calif., to Limestone, Maine, communities that faced devastating job losses as a result of base closings have been able to redevelop the sprawling properties into housing developments, office parks and industrial zones. Now, the government is contemplating more cuts, which could result in the closing of as many as 70 more bases.

At a time when well-situated greenfield sites are disappearing, base redevelopment can be the best opportunity to create major new projects in desirable locations. Developers, working with local authorities, have turned shooting ranges into shopping centers, barracks into apartment buildings and runways into golf courses. A decade of experience has convinced developers that these projects can produce healthy returns for those with the resources, political skills and patience to carry off such ambitious development.

Returns on most office and industrial projects around the U.S. range from 8% to 10% in the first year. Many developers of military reuse sites say their returns are close to those figures, or a bit higher. “It's hard to compare the returns, because our military business is so different from our other development work,” says Cleve Johnson, managing director of Clark Realty Capital LLC in Bethesda, Md., which is developing nearly 14,000 rental housing units on military bases around the country. “Essentially we get the opportunity to make a good investment and get a fair return.”

Lower Land Costs Are A Catalyst

One of the big winners in the first rounds of base conversions was Catellus, which acquired 87 prime acres in the Chicago suburb of Glenview after the Glenview Naval Air Station closed three years ago. Even though the company was bidding against more than 50 other developers, Catellus executives say it walked away with a bargain price — 20% below the then-going rate of $8 per sq. ft. for raw land. The 87 acres are already half filled with corporate settlement, including medical offices, build-to-suits and speculative mid-rise towers.

“With lower land costs we have been able to offer competitive lease rates,” says Kevin Matzke, Catellus senior vice president. “That's why this and so many other closed military bases have been turned into successful redevelopment projects.” He estimates that for Catellus the returns on Glenview are about the same as for other corporate complexes, but “we feel more secure with this kind of investment because the local municipality is very motivated to work as a partner in helping us attract business.”

Developers hoping to get into this sector may not be able to get land so cheaply in future — at least not in the most desirable areas. The Department of Defense has realized that it can make more money off these properties than in the past. For example, the former El Toro Marine Corps Air Station near Irvine, Calif., which was closed in 1999, is being sliced into four parcels and put up for auction this fall. The 4,700-acre site, in fast-growing Orange County, is expected to fetch at least $1 billion. That's more than the government earned from the other 96 base closings combined.

Lessons Learned

Even if they can get a good price, investors need to understand how base conversion differs from other forms of development. It's important to be large, for example, because local authorities favor developers with deep pockets and great staying power to see the transformation of a sprawling military facility through to completion. The process can take five years or more — including waiting for the Pentagon to complete the environmental cleanup that is required in many sites.

Also, a developer has to be able to work with the local and state officials whose political fortunes are tied to the redevelopment. Many closed bases cut across multiple jurisdictions, complicating all sorts of processes, such as obtaining zoning and building permits. Developers also have to handle interest groups, including environmentalists.

Still, base redevelopment is a promising business. All or part of most of the bases closed since 1988 have been turned over to local authorities or developers. “In places where a portion of property still hasn't been conveyed by the military, it's almost always an environmental issue. The clean-up of these sites has been a challenge for us,” acknowledges Patrick O'Brien, director of the Department of Defense's Office of Economic Adjustment in Arlington, Va., created to assist communities faced with base closings. “Every town has had its own experience, but overall we've found that as these bases are returned to the communities they've created a positive economic impact.”

The success stories include the former England Air Force Base in Alexandria, La., Fort Ben Harrison in Indianapolis and the Long Beach Naval Complex near Los Angeles. Most have had the advantage of committed municipalities ready to extend subsidies and a timely building schedule, in addition to a dense population base. Almost every base has been turned to mixed-use development, usually involving a combination of open space or parkland, residential, retail and industrial/office. There's an obvious reason for such multiplicity — the parcels are too big for a single reuse.

How the Process Works

The shutdown and subsequent redevelopment often follow a similar formula: as the closing is announced, a local redevelopment authority is created and work starts on both the environmental clean-up and a master plan for development. Eventually the government deeds the land to the authority, usually at no cost, and private developers make their pitches. Any money the authority realizes from the sale of the land for development is poured back into infrastructure investment.

“The idea is to use this land to help the local economy stimulate job growth,” says David Haase, realty officer for the General Services Administration in San Francisco. “The closing of a base takes jobs out of a community. It's hoped that the land can be employed to bring jobs back again.”

The biggest successes are at bases that are located in areas that are already seeing healthy economic growth. The Glenview Naval Air Station, for example, was located on 1,100 acres surrounded by households with average incomes exceeding $100,000. Colorado's Lowry Air Force Base was in a fast-growth pathway between Denver and suburban Aurora. Since 1994, its 1,850 acres have been redeveloped with 3,000 homes, 2 million sq. ft. of commercial space and a community college campus for 10,000 students.

When the Naval Air Station closed in 1995, the town of Glenview had a master plan ready to go. In October, San Diego-based OliverMcMillan LLC is scheduled to finish its $250 million, 480,000 sq. ft. Glen Town Center mall, flanked by 183 apartments and condominium row homes. That will make the air station's redevelopment 85% complete.

OliverMcMillan, which had never tackled a military reuse project before, got its land free, plus the village kicked in tax-increment financing of $80 million. In return, the developer will house some of its retail tenants in an historic hangar. The total value of construction at the former air station is expected to approach $1.4 billion. That will increase the assessed value of local land for tax purposes by 35% to some $1.35 billion. Yet the air station represents only 15% of Glenview's land mass.

“In the next 50 years, the village will recoup $1 billion in property and sales taxes on just our sector of the air station, so they're getting a good return on their investment,” says Morgan Dene Oliver, CEO of OliverMcMillan. Oliver declines to pinpoint the return he expects on Glen Town, but adds, “We signed our contract in 2000 and we've been able to build this project more quickly than most others we've been involved in.”

Location Is A Factor

Being situated in a growth area is a key to success, emphasizes James Meadows, president of the National Association of Installation Developers in Washington, D.C., which educates communities facing base closure. Meadows also is senior vice president for development in the Napa, Calif., office of Actus Lend Lease Corp., which is privatizing housing for 6,000 military families at Fort Hood in Killeen, Texas. “If you're in a rural area, your opportunities may well be much more limited.”

On the other hand, some remote bases have been successfully recycled. When the Loring Air Force Base in Limestone, Maine, near the Canadian border, shut down in 1994 it displaced nearly 5,000 military personnel working on 8,700 acres, devastating the town of 2,000. After a $160 million government-sponsored environmental cleanup, the Loring Development Authority went to work. It has created a 4,500-acre park, a private airport and a corporate complex for 20 companies, which is made up of refurbished base buildings. Volvo, for example, runs an aircraft maintenance business in a former hangar, while Sitel Corp. employs 350 in a call center in a former dining hall.

“We lost 1,100 civilian jobs when the base closed, and we've already created 1,500 new jobs here to replace what we've lost,” explains Brian Hamel, president and CEO of the Loring Authority.

Don't ask him about the price of his commercial space that remains on the market unsold. Like a lot of base authorities, Loring keeps its prices flexible: “Our leases depend on a lot of circumstances, like how many jobs a new tenant expects to create and what kind of stimulus the company will create in our economy,” Hamel says.

Risks and Rewards

Major bases, however, can produce major delays for would-be developers. Take Fort Ord, which sits on 28,000 acres on Monterey Bay in Marina, Calif. Only a small chunk of the 45-square-mile site has been redeveloped since the army vacated in 1991, even though a master plan was adopted by adjacent communities six years ago. The plan calls for 12,000 housing units, two hotels, two golf courses, a corporate park of 430 acres with 3 million sq. ft. of office and industrial space, and 150 acres with 1.5 million sq. ft. of retail.

Only a few projects have gotten off the ground — a new $120 million campus for the California State University system now serves 3,800 students and 380 homes are under construction. A 20,000 sq. ft. incubator office building was recently finished and a Hilton hotel will begin construction in the fall.

Why the holdup? The No. 1 reason, says Michael Houlermard, executive officer of the Fort Ord Reuse Authority, is that the base cuts across four different municipal jurisdictions, while 62 federal and local agencies — ranging from the U.S. Bureau of Fish and Wildlife to the state Department of Waste Management and the state's Coastal Commission — all have had a voice in redevelopment.

The Sierra Club, for example, was invited to comment on the use of the base's ecologically sensitive land, and the NAACP weighed in on making minority housing available on the base for the area's sizable minority population. “If we only had one town and a few agencies to deal with, this process could be simple and fast,” Houlermard says. “But Fort Ord has become very political. There's just no way of avoiding that.”

Sometimes bases present unique opportunities for developers. Joliet Army Arsenal, some 40 miles southwest of Chicago, struck CenterPoint Properties Trust as an ideal site for an industrial park. When 23,500 acres were carved up for redevelopment in the late 1990s, CenterPoint Properties Trust of Oak Brook won the rights to almost 2,000 acres where it will create the largest industrial project in metro Chicago.

With two major railroads intersecting on the property, CenterPoint decided to build a railroad intermodal center on 620 acres, which would anchor a sprawling distribution hub — a total of 17 million sq. ft. of warehouse and distribution space. Several big tenants, including Potlach Corp. and Partners Warehouse, have signed on and the industrial park is off and running.

John Gates Jr., CenterPoint's chairman and CEO, won't say what his firm paid for the land, but he had the support of state grants to help build roads and utilities. “We've had infrastructure expenses of over $100 million,” Gates says. “To make the site flat, we had to move 8 million cubic yards of dirt, which was twice the dirt moved to build the Hoover Dam. Then we spent $30 million building sewer and water facilities.”

Today, the military continues to hold thousands of acres of land — most of it awaiting environmental clean-up — it doesn't need. Wayne Army, deputy assistant secretary of the Navy for installations and facilities, says the military will place a higher priority in the future on faster divestiture, something that impatient developers doubtless will be glad to hear.

“We realize much of this land has great value and needs to be turned over to the private sector to become useful again,” Army said. “For us, it's an administrative burden overseeing these closed bases. We would rather get rid of them and go home so that we can get back to fighting wars.”